The Far East: Innovations in Public Policy

This article presents a critical overview of the achievements of the Russian government’s current Far East policy and focuses on the realization of targeted programs, the creation of priority social and economic development areas and the free port of Vladivostok, and the distribution free of land. The economic and institutional characteristics of the development of the Russian Far East economies are analyzed. The potential effectiveness of current Far East economic policy is considered and compared with the experience of other countries with high rent in their economies. Finally, the article argues that government policies accelerate regional development only when they are built into a general policy for reducing risk in the national economy.

included the construction of costly infrastructure facilities in the southern Far East. Also, new federal administrative bodies have been formed to better govern the region, and the presidential plenipotentiary envoy in the Far Eastern Federal District was also appointed the deputy chairman of the Russian government.
At present, several strategic policies are being implemented in order to accelerate the development of the economy, to improve the sociodemographic situation, to develop infrastructure, and to improve the investment climate in the region. First, complex development programs are being implemented to realize various investment projects. Second, special economic zones have been created; such as, priority social and economic development areas (PSEDAs) and the free port of Vladivostok. Third, to attract and retain labor in the Far East, the Russian Homestead Act has been introduced, which provides a hectare of free land to new settlers.
These policies have been broadly discussed by experts and laymen alike; however, there is no detailed analysis comparing the current Russian experience with that of other countries with similar economic structures and institutional environments. Therefore, the task of the present article is to analyze the current development policies aimed at the accelerated socioeconomic development of the Russian Far East in the context of the distinctiveness of the development and functioning of the Russian economy and the international experience, as well as to understand the nature of the processes limiting the progressive growth of the regional economy.

The Far East in the context of the development of the Russian economy
It is well known that Russia's economy has a high proportion of natural resource rent. In the recent past, when revenues from commodity exports increased so did domestic demand due to real-wage growth, social spending, government purchases, and the growth of imports. The saved budget surplus was used to pay off government debt and enlarge the budgetary oil fund, while federal budget revenues from crude oil exports were used to pay for large infrastructure projects that at least in part had an image-building character. The rent-seeking nature of the Russian economy is clearly manifested when comparing the revenues of the state budget of Russia and the prices of crude oil on the world market. Fluctuations in Russia's oil and non-oil exports occur synchronously, the initial ratio between them remains virtually unchanged, since the direct or indirect source of capital for commodity production is the income from the supply of oil and gas to external markets.
Besides Russia, the economies of more than fifty countries depend on the export of natural resources. This eliminates the need to export other goods and services in order to pay for imports. In addition, the government does not need to levy taxes to finance its expenses; therefore, it has more freedom to spend funds received from natural resource rent. The government can use rent to pursue a long-term economic policy without the fear of voter backlash, but it can also behave like a rentier, since the need for accountability is not high [1].
In empirical and theoretical studies [2,3] it was found that high natural resource rent, ceteris paribus, causes two trends in the economy. First, there is a significant increase in trade, since rental exports allow the active development of imports, which leads to a reduction in the level of economic diversification. Second, due to the growth of budgetary expenditures, the role of the public sector in the economy significantly increases, reducing the role of individual entrepreneurs and private capital. The fact that in other countries (with comparable and even larger commodity exports) the economic slowdown resulting from price reduction was much less than in Russia is due to differences in the quality of institutions.
To determine how the quality of institutions is associated with natural resource rent and average per capita income, we can compare the following indicators: the index of economic freedom (IEF), the share of natural resource rent in GDP, and per capita GDP. The higher the value of the IEF, the lower the risk to economic activity. Countries with a low IEF (less than 50) are characterized by extremely high economic risk, especially when it comes to attracting direct foreign investment. As a result, the higher the share of natural resource rent in an economy, the lower its IEF. Accordingly, the lower the risk to economic activity, which indicates a high quality of institutions, the greater the per capita income, regardless of the share of natural resource rent in the economy.
In 2014, the proportion of natural resource rent was approximately 15 percent of the gross value added (GVA) of Russia, which is comparable with Chile and Trinidad. 1 Another important indicator is the GDP per capita: in spite of its reduction after the 2014 drop in oil prices, Russia is among the countries with a high average income. However, the quality of institutions in Russia can be greatly improved: according to the IEF, the Russian economy has a very low rating, 2 bordering on the repressive, with a corresponding lack of economic freedom, which is close to that of many underdeveloped countries.
A number of studies [4,5] have noted excessive regulation of the Russian market of goods and services, which hampers competition, innovation, and productivity growth. Significant resources are tied up in industries with low labor productivity. Insufficient development of smalland medium-sized enterprises is a sign of formal and informal barriers to entrepreneurship and hinders the development of the private sector.
State-owned enterprises play a key role in the Russian economy, and the state is increasing its participation in the largest companies that occupy the dominant position in the market, while the participation of private (including foreign) investors is tightly controlled. Guaranteed government support discourages enterprises from increasing their productivity, reducing costs, and introducing innovations. Together with the monopolization on the market, this underscores the adverse effects of increasing state ownership on competition in key sectors of the Russian economy.
For economic development, it is important not only what a country produces and exports, but also how it produces and distributes its products and in what institutional environment this is taking place. What reduces development is not the abundance of resources but an excessive dependence on them. Although the diversification of economic assets is not able to completely eliminate the decline in the national economy in the case of an unfavorable commodity export situation [6], it allows for the significant mitigation of the consequences [7], providing an optimal balance between natural resources, economic institutions, and physical and human capital. Therefore, after the oil shock of 2014, the economies of countries with substandard institutions declined the most. In the absence of quality institutions, efforts to diversify the economy and pursue import substitution policies based on natural resource rent are also highly likely to fail.
Over the last decade, Russian leadership has focused on the Far East, first against the backdrop of high oil prices and then in its future, searching for new rent. At first glance, despite a number of serious problems, the economy of the Far East can develop on the basis of the available rich natural resources and its proximity to the rapidly developing countries of the Asia-Pacific region (APR). The idea of developing the Far East was seen in light of these opportunities and conditions.
From the point of view of the federal government, the region's potential has not been satisfactorily fulfilled. There is no convincing evidence supporting this thesis; however, the assessment is motivated by lower growth rates as compared with the Russian average, as well as in population decline [8], which could not be overcome even with the help of programs that have been implemented over the past two decades. Likewise, the loss of the population has not been reversed despite high per capita budgetary expenditures, which are twice as high as the national average.
Another problem with the utilization of the region's potential [9] is the per capita income of its inhabitants, which is low in comparison to the high natural resource rent created by the economy (reflected in the Far East's existence "under the trend line") (Figure1).

Federal targeted programs
The best way to utilize regional potential, secure the population, and increase incomes is through integrated development programs. A primary example of this is the federal target program, Economic and Social Development of the Far East and the Baikal Region from 2018 to 2025, which aims to create conditions for accelerated development of the Far East, turning it into a competitive region with a diversified economy. The structure of the program will include high-tech production with high added value. Within the framework of the program, it is assumed that due to government investment in the region (thanks to high oil prices), acute infrastructure problems that impede balanced regional economic development will be eliminated.
From 2007 to 2012 a large investment project was implemented in the Far East with the help of foreign investment-this was the infrastructure constructed for the Asia-Pacific Economic Cooperation Summit. However, government investment did not significantly reduce the risk associated with investing in the regional economy. After 2011, the inflow of private capital reversed to outflow, and companies faced a difficult search for investment. The region's index of investment risk remains higher than the national average, 3 which calls into question the attempt to create a favorable investment climate in the Russian Far East. The capital invested in the APEC (image-building) project and other regional infrastructure projects subsidized by the federal budget and extrabudgetary funds have not caused a multiplier effect for the regional economy. On average, for 1992-2014, the investment of one ruble in capital assets increased GRP growth in the Far East only by 0.14 rubles, which is lower than the Russian average (0.20 rubles). In the Far East, major investment programs are mainly directed at state-owned corporations that receive support in the form of benefits and subsidies. Nearly every third company that is ranked as a large enterprise is subsidized by the government. However, the number of government and municipal enterprises providing products and services in the region is far greater than the official statistic. The insularity and opacity of business in the Far East is aggravated by large Russian corporations that absorb joint stock companies and turn them into dependent structures, often taking active assets out of regional jurisdiction.
Indeed, for countries with a high proportion of natural resource rent in the economy, an important condition for development is the creation of infrastructure. However, when confidence drops in the government's ability to protect the interests of investors and businessmen and to establish uniform, clear, and enforceable rules, investment decreases, no matter how high the quality of infrastructure [10]. In addition to institutional conditions, businesses also focus on a country's level of development, and demand an infrastructure that is significantly higher than what is offered. Therefore, investment in the infrastructure of low-income countries generates high growth rates in the national economy. Meanwhile, empirical studies have shown that for countries with medium and high incomes this relationship is much diminished [11]. Despite the fact that the infrastructure quality of the Russian economy is significantly lower than that of the leading economies, it is a country with an average level of per capita income. Thus, public infrastructure spending has a limited impact on Russia's economic growth, and is only one way of redistributing natural resource rent.
On the one hand, the experience of countries with high-quality institutions and a large proportion of rent in the economy (e.g., Canada) has challenged the effectiveness of regional development programs with public participation, as well as the activities of the relevant ministries and agencies that monitor them, due to the frequent blurring of target indicators and the periodic reorganization of government bodies [12]; therefore, the search for how to foster self-sustaining economic growth in the regions is still underway.
On the other hand, countries with a high level of natural resource rent and that are gradually improving their institutional environment have shown that government programs helped reduce regional disparities only when they were built into a general policy for reducing economic risk, created competitive conditions and openness, and were implemented under conditions of decentralized authority, a crucial element for improving the investment climate. For example, consider the emergence and development of new industries in the resource specialization in the pioneer regions of southern Chile [13,14].

PSEDAs and the free port of Vladivostok
In terms of government policy in the region, innovation comes in the form of establishing special economic zones (SEZs), which have special laws governing customs, tax, investment, and related regulation. According to the Ministry of Development of the Far East, within the framework of the special zones, with the aid of tax benefits and various preferential treatments, a favorable business and investment environment will be created for the residents.
Numerous studies have been conducted on the general description, classification, and functional effectiveness of SEZs. There are many examples of failures in the construction of the SEZs, especially in countries with fragile institutions and high natural resource rent, which includes Russia [15].
In countries with a high level of political centralization the problem of awareness has been described in detail [16]. This occurs when officials possessing considerable power and instruments design SEZs without sufficient knowledge of the behavior of the market and society. The problem of awareness is most acute in politically centralized countries, where government officials are preoccupied with planning production and resource allocation (annuity) without taking into account technical capabilities (unlike the private sector). In such circumstances, SEZs are badly planned and the reduction of the tax burden within the special zone can only lead to an inefficient distribution of economic resources. Directive attempts to create cluster structures in SEZs are unlikely to succeed, because they are usually formed spontaneously in a market as a result of the coordination and progress of all sectors of the economy. In this case, the location and sector specialization of an SEZ should be delegated to private business or to work out a common approach in terms of political decentralization [17].
In the first case, this may create partially private SEZs, which would primarily focus on the stability of the environment, good institutions, resource availability, and profitability rather than low tariffs and taxes [18]. In general, private SEZs are more successful than government ones. In the second case, local decentralized authorities are well oriented in the specific conditions of a particular area and can avoid unnecessary infrastructure expenditure and the implementation of ill-conceived projects. Local officials can implement policies more quickly and better understand the reaction of private investors to market dynamics. As a result, the success of SEZs can demonstrate to authorities the benefits of liberalizing the national economy.
One major problem is stimulus: if federal government officials transfer power and control of a SEZ over to the local bureaucracy, local residents may be affected by rent-seeking officials, and their maintenance costs can increase arbitrarily. 4 If the creation of a SEZ is accompanied by massive public infrastructure investment, then schemes that require large amounts of resources can lead to significant cost overruns. The situation is exacerbated in the case of weak institutions. As a result, the infrastructure may not reflect actual needs and may lead to the general inefficiency of the SEZ. In the context of weak institutions and high natural resource rent, officials have an incentive to invest more in the SEZ and thereby indirectly appropriate that rent [17]. From this perspective, the development of private SEZs is more attractive because it does not require large public investment.
In light of the international track record of creating SEZs, we can consider the success of the Russian PSEDAs and the free port of Vladivostok. Through the long history of SEZs, they are primarily created to achieve four goals [15]: (1) attract direct foreign investment; (2) reduce unemployment; (3) support a policy of large-scale economic reform; and (4) test new strategies and approaches for economic development. None of these goals are explicitly present in the development of the PSEDAs or the free port of Vladivostok.
Regarding the creation and development of modern technology in the free port of Vladivostok, not a single resident registered as a high-tech company, which is quite predictable in the context of market contraction and overall economic feasibility. Even though history has shown that private zones are more productive, the zones in the Far East remain state-owned.
These SEZs tend to attract not foreign firms, which usually avoid investing in high-risk economies, but domestic firms that have no better alternatives to increase profits [17]. In the long term, this can cause serious territorial and economic disparities in the region and crowding of the economic space. Since in these cases the SEZs are publicly funded, it is unlikely that they will benefit the economy.
As the experience of other countries has shown, reducing the tariff burden on imports of SEZs can increase the country's exports only if it is included in the global manufacturing cycle of value added through the intermediate goods or components, which is typical for countries with excessive and cheap labor [19]. Also, SEZs may be created in the context of a relatively closed economy characterized by high risk, because foreign firms see these zones as a way to overcome high import and institutional barriers, first, for gaining access to assets and, second, to penetrate national markets. In the first case, this is the experience of Chinese SEZs in Africa, which function with the help of capital from China in the resource-and labor-surplus African countries [15]; as a rule, these are founded on access to natural resource deposits, and the subsequent export of commodities tied to the Chinese market. In the second case, this applies to Russian SEZs located in the western part of the country [20].
In the context of current institutional conditions and the lack of progress in reducing the risk of Far East zones, in addition to the challenges described above, this may remove barriers blocking the importation of supplies to regional markets, which would add to the list of failed attempts of import substitution.
The main problem is the spreading of the effects of PSEDAs to surrounding areas [21]. When creating these zones in the Far East, the experience of other countries with high natural resource rent is frequently ignored, because structural and institutional features impose constraints on the use of such tools. Some countries with high natural resource rent reduce investment risk by transplanting into their economies the more advanced institutions of highly developed countries; however, this has proven too difficult in the current Russian reality. For example, in the United Arab Emirates, the financial center of Dubai is a free economic zone functioning in the framework of British law, which has reduced risk and attracted additional investors, labor, and entrepreneurs from abroad [22].
The significant risk associated with SEZs belonging to countries with high natural resource rent may also be mitigated by access to cheap energy and materials at the expense of large-scale state subsidies for foreign and domestic firms; however, only countries with a very high resource endowment can achieve this (e.g., Saudi Arabia) [23]. On the other hand, countries with weak institutions and high risk have not been able to create successful SEZs. 5 This particularly applies to countries that squandered their natural resource rent, having lost large shares of it as a result of opportunism as well as significant limitations to the rights of foreign investors.
The experience of countries with high natural resource rent but stable institutions shows that SEZs are rarely used (e.g., Winnipeg, Canada) or not used at all (e.g., Australia) due to an overall favorable investment climate in the national economy.

The distribution of free land
The distribution of free land to settlers was a common practice a century ago during the colonization of the Americas, Australia, and South Africa. This process also affected the Russian Empire during the relocation of peasants to Siberia and the Far East. This example is given as an argument for the current distribution of free land (one hectare) in order to secure the population and labor force of the Far East [24]. However, this policy was first conducted during a time when the vast majority of settlers were illiterate peasants, living in a subsistence economy, and having far more children than Russians do today. We must acknowledge that the demographic, economic, and social qualities of an urban population differ significantly from an agricultural one. Therefore, we cannot refer to past experiences that occurred under entirely different economic conditions, and that are characterized by entirely different demographic, structural, and institutional characteristics.
Today, a comparative analysis of this approach from the point of view of modern foreign experience is quite difficult because of the small number of similar examples. However, starting from the few modern examples available, it is possible to question the efficiency of this policy when applied to vast territories like the Far East.
There are some contemporary examples of the distribution of free land in countries with stable institutions. For example, in Canada the authorities representing nine settlements predesignated specific activities that a person receiving free land should perform [25]. The conditions for obtaining free land varied according to region. For example, in St. Louis-de-Blandford, Quebec, after the symbolic return of the advance payment, one had to build a house (no less than $125,000 in value) on the property; in Reston, Manitoba, in addition to an advance payment, one must start building within three months; in Pipestone, Manitoba, a house must be built within one year; in Crownland, Yukon, land can be provided for farming organizations; in Mundare, Alberta, the construction of infrastructure for a business must be started within one year; and in Cupar, Saskatchewan, once a house is built it is exempt from municipal taxes and utilities for a year.
Canada's example clearly demonstrates that strategies aimed at preventing the decline in a region should not become a means of retaining and bolstering the population, including through the distribution of free land. The main objective should be the transition to an economy corresponding to a lower population, which necessitates a revaluation of goals. It should be noted that the distribution of free land in Canada is episodic and very scrupulous-no more than forty sites per one of the nine cities. At the same time, this strategy of the local authorities is being implemented within a broader policy of attracting migrants from abroad and includes a careful vetting of candidates. In addition to Canada, the distribution of small plots of land (only to poor people in rural areas) is being conducted in India at the expense of private funds.
In terms of farming, instead of distributing free land to individuals, in both developed and developing countries, land is consolidated into large areas by large owners or their organizations for efficient agricultural production. Thus, the distribution of one hectare (even if many owners decide to unify their plots) does little for establishing agricultural enterprises.

Conclusion
The present analysis has highlighted the following structural and institutional characteristics of the national background in which the region currently exists: Russia is a country with a high proportion of natural resource rent in its economy, and it has weak institutions, which consequently creates high investment risk. There are many traits that are characteristic of rentier states where the government functions not as a service provider, but as a distributor of income (provided by natural resource rent) and as the founder of government-subsidized jobs.
In Russia, budgetary policy was deformed because the federal budget was actively replenished by taxes levied on natural resource rent. Therefore, even contributing regions lost their self-reliance, and the focus of local elites shifted from the priorities of regional development to federal politics and subsidized management.
Russia is not a unique case-the problems facing its economy have well-known solutions that have been used by a number of countries with high natural resource rent. Russia should heed the experience of countries with a high proportion of natural resource rent, which are now seriously behind in development and exist on the margins of the global economy.
The entire Russian economy faces acute structural problems, and this applies to the Far East in particular-narrow domestic demand, a rigid economic structure, the dependence of specialized sectors on external markets, and over-dependence on the federal government and state corporations for economic development. Under current institutional and market conditions, the possibilities for conducting business in the Far East are very limited. A significant decline in revenues from natural resource rent only highlighted the major structural and institutional problems in the economic development of both the Far East and the country as a whole. Against this backdrop, the creation of opportunities and conditions by implementing a number of strategic policies is thought to improve the chances of the Far East.
The present analysis has shown that public infrastructure investment within the framework of the federal target program cannot produce positive dynamic results in the Far East economy or significantly reduce its investment risk. 6 It seems reasonable to assume that as federal budget revenues decrease so will the financing of federal target programs.
There are questions regarding the further success of the PSEDAs and the free port of Vladivostok in light of the experience of SEZs in countries with similar economic structures and institutional environments. Given the high risks of the Russian economy, the PSEDAs and the free port may attract not foreign but domestic firms, due to a lack of better alternatives for increasing profits in the domestic market. In the future, this could lead to the crowding of the region's economic space.
The modern experience of distributing free land belies the effectiveness of such a policy to attract and to retain human resources within the Far East's vast geography. The experience of countries with a high proportion of natural resource rent and demographic challenges indicates that policies designed to revitalize a region should not strive to retain and secure the population in specific regions, and this includes the distribution of free land.
When analyzing the consequences of current policies, the experiences of countries with high natural resource rent were not taken into account, as structural and institutional features impose constraints on the use of a number of government-intervention tools. As the experience of successful countries with high natural resource rent has shown, government policies accelerated development only when they were integrated into an overall policy to reduce economic risk, foster a competitive environment, and encourage openness, which is key to improving the investment climate. Under these conditions, the Russian Far East would likely develop as successfully as the Chilean Far South. 3. This is despite its reduction, which is supposed to have been caused by the overall alignment of risks between the Russian regions. The index of investment risk is estimated by the rating agency Expert RA and represents a combination of social, economic, financial, criminal, environmental, and managerial risks.
4. From this perspective, the firm will benefit from investments in SEZs as long as it is spending less on administrative barriers than the profits derived from the zone's special status.
5. Often this is a failed project with huge public infrastructure investment, which will not be used in the future due to poor planning and program management, the high costs and the difficulty of access to the power and utility networks, distance from markets, lack of institutional coordination, and so on. 6 Given the fact that the risk for the national economy is very high.